Soured Deal Another Blow for Chinese Solar Company

Suntech Power Holdings, one of the world’s largest manufacturers of solar panels, was already struggling with heavy debt, a global glut of solar panels that has wiped out the industry’s profits and a new round of tariffs imposed by the United States.

On Monday, Suntech, a Chinese company, disclosed a potential fraud committed by an affiliated company that might deepen its troubles.

Suntech said that 560 million euros ($686.6 million) in German government bonds, pledged as collateral for loan guarantees provided by the company, might not exist. The bonds and loan guarantees were part of a complex investment in a European solar development company that used Suntech panels and was financed by a Chinese state-owned bank.

The potential fraud, which the company blamed on a former sales agent for the company, Javier Romero, could stretch Suntech’s already-strained finances to the breaking point. The company already must repay about $540 million in debt next year, and if it had to make good on all of the loan guarantees, it would owe nearly $680 million more.

Executives said that they were investigating and that they might delay reporting the company’s second-quarter earnings.

“This has the highest level of attention from the company and the board,” Dr. Zhengrong Shi, Suntech’s chief executive, told investors on a conference call. “We are vigorously pursuing all avenues to resolve this matter.”

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Solar cells at a Suntech facility in Arizona. The company, one of China’s largest panel makers, is burdened with a heavy debt.Credit
Ken James/Bloomberg News

The announcement sent Suntech’s shares tumbling by almost 15 percent to $1.34 in New York trading on Monday.

In May, Suntech announced a first-quarter loss amid a sharp decline in panel shipments and the added costs from the first round of tariffs imposed by the United States Commerce Department. In two separate cases, the department determined that major Chinese manufacturers of solar cells benefited from unfair subsidies by the Chinese government and have been selling their products below cost.

On Monday, Trina Solar, another major Chinese manufacturer, said its shipments for the second quarter would be about 20 percent lower than expected. And this month, the city of Xinyu said it would pay the debt of LDK Solar, a manufacturer based there that has also been reeling from losses.

But Suntech’s situation may be worse than the other major manufacturers, analysts said, because of its high debt, which they put at about $2.3 billion.

“If this was an American company, there is little doubt in my mind that it would be the next Solyndra — in other words, just a bankruptcy waiting to happen,” said Pavel Molchanov, an analyst at Raymond James.

But Mr. Molchanov and other analysts said that because Suntech has long been one of the largest solar manufacturers in China, with a strong standing in the industry, state-owned lenders in China were likely to continue supporting it.

The potential fraud stems from Suntech’s involvement in the Global Solar Fund, a European company that invests in companies that own and develop solar farms, said David King, Suntech’s chief financial officer. Between 2009 and 2011, the fund sold $346.8 million worth of Suntech panels through affiliates in Spain and Italy, according to a filing earlier this year.

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The chairman Zhengrong Shi said Suntech might have been the victim of a complex fraud.Credit
Nelson Ching/Bloomberg News

Suntech is the main investor in the fund, with an 80 percent stake. Dr. Shi has 10 percent and Mr. Romero has the other 10 percent through an entity called GSF Capital.

Seeking to develop projects after the credit crisis, the fund turned in 2009 to the state-owned China Development Bank, Mr. King said. The lender required a local guarantor with assets in China in order to make loans. As a result, Suntech agreed to backstop a credit line from the bank to a company called Solar Puglia, and in turn secured collateral of its own in the form of German government bonds from Mr. Romero’s entity.

The company said it now believes those bonds may be fictitious.

Suntech executives said outside advisers they hired to help them sell Global Solar Fund assets to raise cash found indications that the bonds never existed. The company has filed lawsuits to gain control of the fund and its assets.

The plans to sell the fund’s assets are temporarily delayed, Mr. King said, and the company is pursuing other credit sources and issuing bonds in China to help raise money.

Analysts said the very lending that has helped China dominate the global panel market so rapidly is creating some of the problems Suntech now faces.

“Bottomless access to bank debt really allowed the Chinese companies to continue to sell at losses and have poor profit-and-loss income statements in order to gain market share,” said Adam Krop, an analyst at Ardour Capital. “Unfortunately that’s not working out for them right now.”

Before the most recent events, Suntech had been seeking to raise as much as $750 million from American investors. But Mr. Krop said it would be difficult for Suntech to raise money in the United States because investors had been “burned for too long by these names.”

A version of this article appears in print on July 31, 2012, on page B2 of the New York edition with the headline: Soured Deal Another Blow for Chinese Solar Company. Order Reprints|Today's Paper|Subscribe